Municipal P3s have unique challenges that differ from larger provincial and federal projects
When people think of public-private partnerships (P3s), it’s often in relation to large-scale projects, procured by the federal or provincial governments such as hospitals, court houses, schools or prisons, says Catherine Doyle, a partner with Blake, Cassels & Graydon LLP in Toronto. Yet, for Doyle, municipal P3s are where both innovation and challenges are taking place. Often these projects involve different classes of assets, she says, covering core functions such as transit, energy, water and wastewater projects.
In fact, municipal P3s differ greatly from their larger brethren in various ways, say lawyers in the field. There is often a wide disparity in credit worthiness among municipalities, multiple levels of stakeholders, a high level of public scrutiny and a lack of consistent, commoditized documentation. Still, all of these challenges invite new and creative ways to adapt the P3 model.
“Currently, we’re seeing a growing number of municipal P3 projects moving forward through the procurement and construction process, over 20 at present, in many parts of the country, and in many sectors,” says Mark Romoff, president and CEO of The Canadian Council for Public-Private Partnerships (CCPPP). He cites the Saint John Safe Clean Drinking Water Project, Pan-Am Athletes’ Village in Toronto, Confederation Line LRT in Ottawa, Saskatoon North Commuter Parkway and Traffic Bridge Replacement, and the Surrey Biofuel Processing Facility as current examples.
According to Romoff, there are now 225 P3 projects across Canada with a value of over $72 billion among those that have reached financial close. The vast majority are at the provincial level (166), while 12 are at the federal level and 47 on the municipal front. Of these 225 projects, 133 are operational, 60 under construction and 32 in procurement.
“The traditional vernacular to describe a P3 is some combination of ‘Design, Build, Finance, Operate and Maintain’ (DBFOM),” says Doyle. “What’s different from many federal and provincial projects is that the ‘O’ and ‘M’ are really key in the municipal sector; the private sector is engaged in the whole package, so it’s actually quite a different risk profile. The ‘OM’ in a municipal P3 is often the entire operation of the project — not just a facilities management role. For a waste treatment facility, for example, this impacts both the design and the concession period, and there is more limited expertise in the private sector for such specialized services.”
Financial Disparity
In April, PPP Canada announced it was accepting applications under Round Seven of the renewed P3 Canada Fund. To date, $1.3 billion in investments has been announced to support projects across the country in provincial, territorial, municipal and First Nations infrastructure through the fund. Many of these applications will be from municipalities.
There is also a wide disparity in the financial states of municipalities, “so one of the stabilizers, and in fact the flattening of the playing fields, has been, and will continue to be, PPP Canada, providing funds, procurement expertise, and standardization of the procurement documents,” says Greg Southam, a Toronto-based partner with Davies Ward Phillips & Vineberg LLP.
Funds from PPP Canada are typically injected at the front end of the project, Southam explains, making them available for payments during the construction period or as substantial completion payments. This is critical, he says, since municipalities rely on a relatively fixed tax base, and the funding from PPP Canada decreases the load on this tax base and allows the financial commitment of a municipality to be spread out over time.
Southam says for the private sector – lenders, construction companies, private equity, developers – this funding ensures a level of certainty about how the project will unfold. “I don’t know whether these projects would be able to go forward without this money and expertise.”
Small Projects Pose Challenges
Romoff says the size of the project matters when municipalities consider P3s, traditionally seen to be feasible in the $100-million range or larger, yet as municipal projects come on the horizon, they are often much smaller.
“They really are all over the map depending on the type of P3 model chosen and the sector. To put municipal projects into perspective, the Brockton Water & Wastewater System or the Goderich Water & Wastewater System are simple Maintain and Operate contracts for $2.48M and $5.2M, respectively. On the other end of the spectrum, the Ion Stage 1 LRT project in the Region of Waterloo is worth $1.48B over the life of the contract and is a DBFOM.”
One answer is to bundle projects, which is still fairly uncharted territory, but one that has seen some innovation and success, says Godyne Sibay, a partner with McCarthy Tétrault LLP in Toronto. “Ontario is now using a $100M threshold for its P3 projects. The municipality should likewise consider a $100M threshold in capital costs in considering a P3, and likely even higher if it’s a ‘Design, Build, Finance, Operate and Maintain’ model,” she says. “This is because with the transfer of both lifecycle and operating risk under a DBFOM, there is much greater complexity in the procurement and management of the project over the typical 30-year term. The related costs and commitment to this long-term partnership are too much of a burden on lower-value projects.”
Sibay sees challenges in project bundling where there are multiple sponsors. In a municipal context, a $35M water treatment facility on its own would not justify a P3 approach. But bundling four such projects together (across separate municipalities) would reach that critical $100M threshold. The projects must also be essentially the same.
Police facilities, schools and water treatment plants, Sibay says, are ideal to bundle as the single Project Company, and the design and construction team can achieve significant efficiencies through duplicating design, engineering and construction.
To do this, she says, “municipalities (or other co-sponsors) appoint a single procurement authority, Infrastructure Ontario (IO), for example, to run the procurement, and IO enters into a single Project Agreement with the lead private-sector partner, as was done in the delivery of many of the Pan Am venues. Infrastructure Ontario and Toronto 2015 represented the Cities of Hamilton and Milton as well as York University under a single procurement and a single Project Agreement to develop two stadiums and a velodrome facility.”
Another example is Saskatoon’s Civic Operations Centre project, says Sibay. “This project will co-locate the new Saskatoon Transit Operations Facility and the City’s first Snow Management Facility for the permanent snow storage decontamination facility as part of the Civic Operations Centre for the City of Saskatoon.”
Lack of Process Consistency
Although municipal P3 projects are not yet a reality in Québec, says Robert Borduas, it’s only a matter of time, as the province has a rich expertise developed by Infrastructure Québec on provincial projects such as Highways 25 and 30, CHUM Research Centre and the Montréal Symphonic Orchestra Concert Hall.”
Borduas, a senior partner with Norton Rose Fulbright Canada LLP in Montréal, says, “P3s have numerous advantages; for example, you almost systematically achieve the timetable, on time and on budget, with a fixed price for your operation and maintenance.”
On the other hand, one of the downsides is the process is not yet as standard as a traditional procurement project, he says, “so you need to involve external consultants and bring the project to a point where its objectives are very well defined, so as to have a fair process for all the bidders and optimize the risk sharing between the private partner and the authority.”
Another challenge for both lenders and other private-sector entities is that, at the moment, across the country there is a lack of consistency in approach by municipalities to these projects. “If you’re bidding on a very large provincial P3 project being procured by Infrastructure Ontario, say a hospital, school or courthouse, there’s a very standardized set of documents, a very well-established process and everyone knows what to expect,” says Doyle.
In contrast, municipalities are often choosing from different approaches across the country; their documentation tries to take the best from everything, and so is not standardized. “What lenders to these projects are lending on is basically the contracts,” says Doyle. “The project company doesn’t own the asset, as that asset is still owned by the public. So lack of consistency among the documentation creates higher bid costs, as well as requires more due diligence on the part of the private sector.”
Direct Public Input
Romoff says there’s often a much higher level of consultation and input from the public in regard to municipal projects, as opposed to federal or provincial, as these tend to be projects that matter a lot more to the citizen on the ground.
In 2013, the City of Regina held a public referendum that supported the use of the P3 model for its Wastewater Treatment project. Direct public input can sometimes determine whether a municipal project proceeds at all, says Doyle.
“The Greater Vancouver Region is at the forefront of a very public discussion on infrastructure development, having recently rejected a plebiscite on the region’s long-term plan to improve transportation and how to pay for that plan. P3s will have to be strongly considered to deliver the projects Vancouver needs and wants,” says Romoff. “Consultation is key when it comes to municipal projects as we’re talking about infrastructure that affects people’s daily lives. The consultations in the Greater Vancouver Region are a great example of how the community has a direct opportunity to impact infrastructure planning.”